(03) 9020 2905PORTFOLIO POINT: This is the 7-Eleven column – the seven things DIY super trustees must do in 2011 to keep your SMSF in top shape.
It’s already a quarter-hour past sunrise on the 2011 calendar year and it’s time to wake yourselves from the Christmas slumber and get your butts into gear. No time to waste. This year is going to be an important one for super – certainly on a legislative basis, but, as always, on how your own fund performs.
There’s probably little you can do on a legislative front – except moan loudly, which I promise to do on your behalf, as regularly as is required – but as a trustee, you have complete control over your fund’s performance and how capable it will be of looking after you in your twilight years. (It’s a better bet than relying on your Generation X kids, who have an eye on the whole estate.)
Without delving into politics (because we’ve got the rest of the year to do that), today I’m listing seven important things to think about in regards to your fund for 2011.
I will keep faith in Australian equities
Last year was a great big yawn for Australian equities. Total return? Less than 2%, including dividend reinvestment. Sure it followed a pretty big bounceback in 2009, but you still get the feeling that there’s a spring, a jack-in-the-box, possible for 2011.
Commentators/experts/analysts (ie, the usual crowd) seem to be pretty confident that we had a much-needed breather in 2010. After an appalling calendar year 2008, a phenomenal 2009, calendar 2010 was the dull year markets probably needed.
I’m not recommending to pull cash from everywhere and load up on speculative stocks in Australian equities. Not by a long shot. What I’m suggesting is that it’s probably not a time to be pulling out of Australian equities and chasing the security of cash (which we’ll discuss further down). If equities are part of your repertoire, they should remain so. And if you’re feeling confident, some early indications are that there could be some healthy returns there this year.
Australia’s economy is looking healthy. Resource demand is strong. Our banks are, no matter which way you look at it, almost ridiculously profitable. Our property doesn’t appear to be in any grave danger of accidentally popping like balloons at a three-year-old’s birthday party. Apart from the mother of all “La Nina” weather patterns smashing the east coast with phenomenal floods, Australia is looking in pretty good shape.
Review your asset allocation. What percentage of your SMSF’s portfolio is in local equities? Probably not the year to be making substantial reductions.
I will investigate currency hedging in my international portfolio
Can Australia’s dollar go higher? Well, yes, it can. Is Australia’s dollar very, very highly valued in a historical sense? Of that there is no doubt.
The Aussie could spike a further 10%. Or it could take a beating in 2011. Or it could one then the other. If you believe the Australian dollar is highly valued at the moment, then it is time to start investigating options for unhedging a part of your international shares portfolio.
One good cheap way of doing this is through the use of a limited number of fund managers who offer hedged and unhedged versions of the same fund (such as Vanguard with its international shares portfolio). You don’t have to go the whole hog. You can hedge a portion of your international shares exposure (see my article of 1/7/2009 for more information on how you can potentially use hedged in international managed funds).
I will hold ample defensives
“Normality” existed in calendar 2010 in regards to cash and fixed interest. The slightly higher risk fixed interest category outperformed cash by around 1.5%.
However, there are two nice things about Australian cash at the moment. One, it’s still guaranteed. Two, Australian interest rates are relatively high. You can get a return above 6% without too much effort at the moment. And, if you’re prepared to do a bit of paperwork every few months and open a new bank account or term deposit, you can get fixed interest-like returns with reduced risk.
Sure, cash is dull. Cash is boring. But cash can also be king. It can’t (well, it doesn’t) go backwards. A “risk-free” return in cash will, at the moment, be considerably ahead of inflation. Get yourself a good online cash account, perhaps teamed up with a bit of money in term deposits, and make the most of cash’s stable, if boring, returns.
I will rewrite/update my “investment strategy”
Investment strategies are not just that dull document that sits with the SMSF trust deed that you have sitting there, just in case you ever get an “audit” letter from the Australian Tax Office. Having an investment strategy is a legal requirement. And the government is considering recommendations from one of the zillions of reports it has commissioned, to force SMSF trustees to use it more widely, potentially to take into account insurance needs, for example.
You should take your investment strategy document seriously. An investment strategy is your chance to sit down calmly and decide exactly what sort of investments should be made on behalf of members and exactly what sort of risks you are prepared to take to achieve those returns. And, if audited, a proper investment strategy will go a long way to showing the ATO you take your responsibilities as a SMSF trustee seriously.
Yes, you have to have it. And you should sit down every two years, maximum, to review it. You probably get so involved in the actual investing, you may lose sight of the forest for the trees.
If I am 50 to 60 years old, I will implement/bone up on super pension strategies
The lack of knowledge in the area of super pensions and transition-to-retirement pensions is concerning. I’ll do my bit in the coming weeks to raise some awareness, but let me start with this.
If you are over 55 and not on a transition to retirement pension, you are probably throwing away money
TTR strategies should really start when a person turns about 50, 51 or 52. If you were born before June 30, 1960, then you will get access to your super from the age of 55. If you are only a few years away from that, then you should be considering raising your contributions (concessional and non-concessional) now, because you’ll be able to start accessing them shortly.
If you are over the age of 55, even more so if you’re 60, then you’re already able to start accessing a super pension. Accessing a super pension is not just about receiving a tax-advantaged income stream, it’s also about being able to contribute more to super and making your super fund a tax-free vehicle from an earnings sense.
If you are over 50, it’s time you either did the research yourself, or spoke to a financial adviser (or accountant) about how to maximise your benefits and minimise the tax paid by your super fund (SMSF or managed fund super account).
And I promise to help.
I will make the most of the higher concessional contribution limits
If you’re over 50, you’ve got less than 18 months to make the most of the the higher concessional contributions limits. And this is not an opportunity to waste.
The higher $50,000 concessional contribution limit is only available for the 2010-11 and 2011-12 financial years. And it’s only available to those who are over 50 and eligible to make concessional contributions. It does include your 9% superannuation guarantee contribution.
If you have spare cash flow, and you’re close to getting your hands on super (see the point above this), then making the most of the temporary $50,000 concessional contribution limit over the next 18 months is crucial. From July 1, 2011, everyone will have the same $25,000 concessional contribution limit.
I will adjust my salary sacrifice arrangements prior to June 30
This point necessarily takes in the previous points. It’s particularly important to use this with concessional contribution limits, but for those who are (or should be on) super pensions, then you need to review this annually. Make a note in your diary for May, which is usually a good time to do the reviews. It will both allow you to get things ready to roll correctly for July 1 and also fix up any contribution excesses/shortfalls before June 30.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.